Why does it cost so much to eat in Sri Lanka?

Sri Lanka has a high cost of living. Data for August 2017 gathered by Numbeo, a crowd-sourced database, indicates that grocery prices are 34.48% higher (and consumer prices 25.22% higher) than in India.

Chicken is actually cheaper in Singapore than in Sri Lanka. Whole chicken retails for around Rs.425/-kg, while it is available in supermarkets in Singapore for around S$2.85 for 800g or Rs.412/kg. Unlike Sri Lanka, Singapore imports most of its food yet domestically produced chicken in Sri Lanka is marginally more expensive, even after taking into account Singapore’s higher rents and salaries.

Compared to Malaysia, which does produce its own chicken it is even worse; chicken breast costs Rs.670/kg in Sri Lanka but only RM 12.99/kg in Malaysia equivalent to Rs.472/kg.

One reason for the high prices is tax, Sri Lanka’s Government taxes food, sometimes quite heavily.

Chicken prices are high in Sri Lanka because of the high taxes levied on the raw materials used in poultry feed. The two main ingredients maize and soybean meal are taxed at an effective rate of 90% and 45%, respectively. (This is the total tax made up of duty, PAL, VAT, NBT , Cess.)

The Government imposes these taxes to promote the domestic cultivation of these crops, neither of which were cultivated on a mass scale until recently. In terms of stimulating production, the strategy has worked: the country produces around 200,000mt of maize and 30,000mt of soybeans but at a huge cost to consumers who have to pay higher prices for chicken.

The protection is generally justified on the grounds of promoting local production but in the case of wheat, protection is even extended to domestic processors of imported wheat grain.

Sri Lanka does not grow wheat as its climate is unsuitable so the entirety is imported. Wheat is the second most important cereal consumed after rice and its importance is growing as consumption is increasing. Lifestyle changes due to urbanisation, increase in the number of working mothers and the demand for convenience foods are some of the factors that are driving growth.

A high tax applies on wheat flour (effectively around 85%) while a lower tax (effectively around 23%) applies on wheat grain. This results in a high effective protection for domestic wheat millers who import the grain and grind it to flour.

The millers are able to earn a significant excess profit (termed a “rent” in economics) due to the differential in taxes between grain and flour. The local millers are able to sell flour at high prices because the duty keeps the price of imported flour high. The apparent anomaly is no accident but the result of lobbying by industry groups to protect local industry.

The result of these policies is that wheat flour costs Rs.92/kg in Sri Lanka but is available for Rs.49/kg (RM 1.35/kg) in Malaysia. World wheat prices (along with other commodities) have fallen 50% since 2013 but the price of bread in Sri Lanka keeps rising.

These but two examples, there are plenty of others as recent policy has been directed towards import substitution both in agriculture and industry.

A second reason for the high levels of tax is revenue. Government spending has grown by leaps and bounds: between 2010-2015 total expenditure grew by 81.5%. The Government has sought ever more innovative ways to tax in order to support the growth in expenditure.

A basic principle of tax is that if revenue is to be raised, the most effective way to do so is to tax essentials. People have limited options with essentials so consumption does not drop significantly when taxes are raised.

This is why the Government has chosen to tax food. Sri Lanka’s Government earns substantial revenue through food taxes. The Special Commodity Levy (SCL), which usually applies to food earned the Government Rs55.8bn in 2016.

The public is unaware of the extent to which food is taxed, so we have compiled a table showing the tax on basic food stuffs. The results are surprising, even shocking. Import taxes add Rs.130 to a bottle of cooking oil, Rs.880 to a kg of butter, Rs.625 to a kilo of yoghurt. The table gives details of the taxes.

Last Updated 16 August 2017. For an updated list of taxes on Food, Personal and Household Care items, click here.

The burning question is does the public receive decent value for the money they pay as taxes? There was an 81.5% increase in public spending between 2010-2015 and since the population growth in the period is negligible this translates to a sizable increase in per capita spending.

Is the average Sri Lankan significantly better off than in 2015 when compared to 2010? Is there a palpable improvement in the health service, the education system, the system of justice?

It is not an easy question to answer but what we do know is that a lot of the money is wasted, stolen or otherwise misused.

For example, the largest loss-making state enterprises lost Rs.54bn in 2016, with Sri Lankan Airlines alone losing Rs.28bn. The entire revenue earned in 2016 through the Special Commodity Levy basically covered the losses of the largest loss making state enterprises. Theoretically food taxes could have been cut to zero if these losses had been avoided.

There are innumerable other instances of corruption, waste and extravagance, a lot of which is hidden in state enterprises that are being paid for by tax payers – one well documented instance is the loss of Rs.15bn involving imported rice at Sathosa which was revealed in a report by the Auditor General. Even most politicians will admit that corruption and waste are serious problems.

Sri Lanka has a bloated public sector – partly as a result of politicians “creating” jobs to help constituents. Taxing citizens and then doling out state sector jobs is not a recipe for wealth creation.

The Government recruited 567,091 workers in the past 10 years and we now employ 1.3m people in the public sector with a further half a million pensioners. Salaries and pensions take up 50% of Government revenue with interest taking up a further 36%. Including capital repayments, debt service alone consumed 80% of Government revenue in 2016.

These numbers don’t seem to add up- expenditure far exceeds income. How does the Government balance its books? The truth is they don’t, Sri Lanka has run deficits for decades. Current spending is met by further borrowing which is why the public debt has grown to Rs. 9,387bn and the interest bill has ballooned.

Too many assume that if the Government provides something at no charge it must somehow be “free”. Unfortunately as the saying goes, there is no such thing as a free lunch. The taxes on food mean that in Sri Lanka this is literally true.

The fact is that the Government has no resources of its own. The only resources they have is what they can extract from the populace. Whatever is distributed “free” or “subsidised” does cost real money: money that is extracted from the population as taxes; including food taxes.

What can be done?

They only way we can deal with this is by holding government to account. To do this we need information – this is why transparency is important. The Government needs to publish regular data on its workings so that people can see what activities are being done. The RTI Act establishes the duty to publish data, every ministry should be made to act on this and publish a set of key performance indicators, details of expenditure and activities carried out.

The functioning of two key oversight bodies the Committee on Public Accounts (COPA) and the Auditor General (AG) must be strengthened.

At a minimum COPA hearings must be open to the public. To strengthen its independence, non-parliamentarians could be appointed to the COPA. This is not without precedent and given the importance of the committee something that should be considered seriously. It is suggested that the main accountancy bodies; the ICASL, CIMA, ACCA, AAT and the Chartered Financial Analysts each be invited to nominate a member to serve on the COPA.

The AG must widen its scope of audit to include performance audits or value for money audits. This assesses spending on three parameters:

Economy: minimising the cost of resources used or required (inputs) – spending less;

Efficiency: the relationship between the output from goods or services and the resources to produce them – spending well; and

Effectiveness: the relationship between the intended and actual results of public spending (outcomes) – spending wisely.

This will reveal if the Government spending is indeed providing value for money. There are many things that the government engages in from the basics such as health and education to running a bewildering array of commercial enterprises from hotels to plantations.

Value for money audits will help us understand what activities benefit the public and which ones don’t. This, together with transparency, is the mechanism by which waste and loss can be identified and eliminated. Expenditure can be prioritised to those areas that need it and deliver real benefit to people.

A reduction in inefficient or uneconomic activity will allow taxes to be reduced, benefiting ordinary citizens.

Unless we get the Government to control its expenses, eliminate waste and corruption we will be saddled with high taxes and a high cost of living.

The writer is a fellow of the Advocata Institute.For more essays and information on food taxes and please refer the Advocata research page on http://www.research.advocata.org/